Tuesday, August 13, 2013
As offshore accounts draw greater scrutiny, some financial advisers are having their clients use a special trust as an alternative strategy to shield their assets from potential lawsuits.
So far, 15 states allow the creation of domestic asset protection trusts, which safeguard securities or other assets of the owner. In the past, they weren't widely used and few states allowed them.
One big driver of the trend is that offshore accounts--commonly used to ward off creditors--have grown less popular amid an ongoing Internal Revenue Service crackdown. The tax agency, which also contends the accounts help wealthy Americans evade taxes, has beefed up reporting requirements as well as penalties for violators.
Increasingly, some advisers are having more discussions about domestic asset protection trusts as a matter of course with any client who owns a business, works in a high-risk profession like medicine, or worries that a child may wind up in a divorce.
"We have been seeing a lot more of them," said Edward J. Mooney, managing director of BNY Mellon Wealth Management.
Recently, Mr. Mooney raised the matter with a client who owns a shipping construction business in the energy sector. A boom in the fracking business, which carries the risk of liability over environmental damage, has prompted more use of the trusts, the adviser said.
Anyone who wants to set up a domestic asset protection trust has to be prepared to work with a trustee in the state where the irrevocable trust is established. A client in Illinois, for example, can't set one up in his home state. So an adviser can help find the best state, and work to find a good trustee--usually a corporate trustee--to manage the trust there.
Alaska, Delaware, Nevada, and South Dakota were early adopters of the trusts, and have been the most popular locations to site them.
Illinois adviser Michael C. Foltz has been working with a client who is thinking about selling his electronic parts manufacturing business, but wants to keep his estate from having to pay state estate taxes on the proceeds. Mr. Foltz suggested a trust in a state with no state estate or income tax. He also broached the idea of setting up the trust to protect its contents from future creditors.
"First and foremost, the estate planner is trying to find ways to reduce or eliminate estate tax, and if they can layer creditor protection on top of that, so much the better," said Mr. Foltz, a wealth manager at Balasa Dinverno Foltz LLC in Itasca, Ill., with about $2.1 billion under management.
Robert J. Robes, an estate attorney with Greenberg Traurig in Boca Raton, Fla., said a domestic asset protection trust won't work for someone who sets it up in the face of an impending lawsuit. Instead, it must be in place well in advance of any litigation.
"Be as proactive as you can," Mr. Robes said. "Oftentimes clients react to potential liability when something is starting to bubble up, which is too late."
And don't put assets into the trust that are needed for the family to live on. Instead, think of it as a way to protect a nest egg, he said.
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Posted by James Shenwick